The Nature of Construction Contracts

1
The Nature of Construction

Contracts
A variety of factors make a construction contract different from most other types
of contracts. These include the length of the project, its complexity and its size,
and the fact that the price agreed and the amount of work done may change as it
proceeds. As a result, the allocation of these risks is a very important part of the
contract since these factors always result in additional costs being incurred. This
inevitably raises the question of who should pay or bear these extra costs.
Complex nature
The structure may be a new building on virgin ground. It may involve the demo-
lition of an existing building and its full reconstruction. It could involve partial
demolition and rebuilding, or the refurbishment and extension of an existing
building or structure. This may be mostly below ground (in which case it is
engineering) or above ground (in which case it is building). Building, however,
includes foundations and other underground works. A building contract can con-
sist of activities and services carried out both above and below ground level.
The term ‘construction contract’ or ‘construction law’ is used throughout this
book. The term includes contracts for building works as well as engineering con-
tracts. Chitty on Contracts introduced for the first time in 1999 a chapter on the
subject in its 28th edition (see ch. 37). Architects traditionally design and admin-
ister building contracts. The Architects Registration Board (ARB, see www.arb.
org.uk) now regulates its academic and practical training. Consulting civil e ngineers
design civil engineering works and administer their construction. A large engineer-
ing contract usually makes provision for administration and supervision by site-
Copyright © 2016. Macmillan Education UK. All rights reserved.
based resident engineers. Modern contracts also provide for the appointment of
project managers to coordinate and administer the contract.
What is a construction contract?

In Modern Engineering (Bristol) Ltd v. Gilbert-Ash Northern [1974] AC 689,
Lord Diplock at 717B described a building contract as:
an entire contract for the sale of goods and work and labour for a lump sum
price payable by instalments as the goods are delivered and the work done.
Decisions have to be made from time to time about such essential matters
as the making of variation orders, the expenditure of provisional and prime
cost sums and extension of time for the carrying out of the work under the
contract.
It is important to realise that Lord Diplock was referring to a contract made using
a standard form of building contract. Such contracts usually make provision for
interim payments at regular intervals as the work proceeds, whereas a contract
1
Adriaanse, John. Construction Contract Law, Macmillan Education UK, 2016. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/salford/detail.action?docID=6234628.
Created from salford on 2020-09-03 02:06:10.
2 Construction Contract Law
that is described as entire is a product of the common law. It may make provi-
sion for stage payments, but in essence, it requires the contractor to complete
all its work before any entitlement to payment arises. A modern example of such
an entire contract is Discain Project Services Ltd v. Opecprime Developments Ltd
[2001] EWHC Technology 450. The carrying out and completion of this con-
tract (whether made using a standard form contract or entire) differs from other
manufacturing processes. HHJ Newey OR in Emson Eastern v. EME Develop-
ments (1991) 55 BLR 114 described the differences at p. 125, within the context
of practical completion of the work:
I think the most important background fact which I should keep in mind is
that building construction is not like the manufacture of goods in a factory.
The size of the project, site conditions, the use of many materials and the
employment of various kinds of operatives make it virtually impossible to
achieve the same degree of perfection that a manufacturer can. It must be a
rare new building in which every screw and every brush of paint is absolutely
correct.
There is no special body of rules that applies to such contracts, whether they are
described as building, engineering or construction contracts. Lord Reid said in
Modern Engineering that where the parties enter into detailed building contracts
there were ‘no overriding rules or principles covering their contractual relation-
ships beyond those which generally apply’. This principle was supported by Lord
Lloyd of Berwick in Beaufort Developments (NI) Ltd v. Gilbert-Ash (NI) Ltd
[1998] UKHL [1988] 1 AC 191, where he stated that:
Standard forms of building contracts have often been criticised by the courts
for being unnecessary obscure and verbose. But in fairness one should add
that it is sometimes the courts themselves who have added to the difficulty by
treating building contracts as if they were subject to special rules of their own.
The fact that the ordinary rules of the law of contract apply is subject to an import
ant qualification. The legislation passed following the recommendations of the
Latham Report (Constructing the Team, 1994) treated construction contracts as
a special category requiring statutory intervention. The introduction of Hous-
ing Grants Construction and Regeneration Act 1996, part II (hereafter HGCRA
96), and its amendment by the Local Democracy, Economic Development and
Construction Act 2009 part 8 have altered fundamentally the allocation of risks
in construction contracts. The amended Act became law on 1 October 2011. All
parties before entering into contracts have to consider how they will deal with the
legislation. It also provides a much wider definition of what, for the purposes of
the legislation, is a construction contract and what is included in the phrase ‘con-
struction operations’.
Section 104(1) of the HGCRA 96 states that a ‘construction contract’ includes:
• the carrying out of construction operations

• arranging for the carrying out of construction operations by others, whether
under a subcontract to him or otherwise
• providing his own labour, or the labour of others, for carrying out con-
struction operations.
The Nature of Construction Contracts 3
Section 104(2) extends the definition of a construction contract to any agree-

ment to carry out architectural, design or surveying work; or the provision of
advice on building, engineering, interior or exterior decoration; or the laying out
of landscape. Note that a contract of employment is specifically excluded from
the statutory definition. This definition is much wider than that given by Lord
Diplock above. It includes the carrying out of design activities and the giving of
advice, so widening the range of activities covered by the legislation. Construc-
tion operations are further defined by section 105 as including:
• all normal building and civil engineering works, including operations such
as scaffolding, site clearance and painting and decorating as well as contracts
for repair and maintenance
• consultants agreements on construction operations
• labour-only contracts
• contracts of any value.
Certain contracts are excluded from the operation of the Act: see section 105(2).
The reason for this is that they did not suffer from the same ills identified by the
Latham Report. The petrochemical and process industries are excluded, and so
are contracts concerning the supply and fixing of plant (including supporting
steelwork). These activities are not classified as ‘construction operations’. The off-
site manufacture of components to be incorporated into the construction work
is also excluded, as are contracts with residential occupiers (see section 106).
There is, however, a substantial body of case law resulting from contracts with
residential occupiers. These involve either the use of standard forms of contracts
or other contracts that make specific provision for adjudication. This is discussed
further in Chapter 16. In a number of cases the meaning of construction oper
ations has been considered. Homer Burgess Ltd v. Chirex (Annan) [2000] BLR
124 held that pipework was part of a pharmaceutical plant and not a construction
operation. By contrast, in Palmer Ltd v. ABB Power Construction (1999) BLR
426, the subcontractor work was held to come into the definition. This was so
despite the main contract work being outside the definition. Staveley Industries
Plc v. Odebrecht Oil & Gas Services (2001) 98 (10) LSG 46 held that structures
on the sea bed below low water mark are not part of the United Kingdom for the
application of the Act.
Problems with ‘Construction Operations’

A basic rule in the law of property is that things attached to the land become part
of the land. One question then is does section 105(1)(a) ‘[the] construction,
alteration, repair, maintenance, extension, demolition or dismantling of build-
ings, or structures forming, or to form, part of the land (whether permanent or
not)’ import the law on fixtures into the Act? HHJ Seymour in Gibson Lea Retail
Interiors Ltd v. Makro Service Wholesalers Ltd [2001] BLR 407 thought it did so.
In that case he found that the work carried out by the contractor did not attach
to the land and was not a construction operation. Coulson J in Savoye and Savoye
Ltd v. Spicers Ltd [2014] EWHC 4195 (TCC) was not convinced that Parliament
had done so. He comprehensively reviewed the law on chattels and fixtures. The
contract was to design, supply, supervise and commission a new conveyor system
at the site of an existing factory. On a reference to adjudication the employer
claimed the contract was not for construction operations under section 105 and
the adjudicator had no jurisdiction. The adjudicator disagreed and awarded the
contractor the value of its invoices as the client had not served withholding (pay
less) notices. After a detailed review of the authorities, the judge concluded that it
was a construction operation. It fell into the section as the structure was attached
to the land and not purely a chattel (i.e., a product). Edwards-Stuart J applied
Savoye and Savoye in Fahstone Ltd v. Biesse Group UK Ltd [2015] EWHC 3650
(TCC). The case involved the supply and installation of a computer numeric
ally controlled woodworking machine used to manufacture windows and similar
items. A number of defects with both the machine and the software resulted
in adjudication. In the enforcement proceedings the supplier argued that the
work was not a construction contract. The judge visited the site to see how the
machine had been fixed as the parties were in conflict over how easily it could
be removed. After review he concluded that there was a triable case as it was not
permanently fixed to the floor, and gave the supplier leave to defend the action.
It is not only fixtures that create uncertainty. Constructing a power station
requires substantial civil engineering operations to make it possible. It is quite
difficult for contracting parties to differentiate between the two activities and
to know when it is a ‘construction operations’ and when it is not. Coulson
J in Severfield thought it was a ‘muddle’ which was inherent in the original
proposals to exempt certain activities from the adjudication [paras 16, 22 and
62]. The issue in Severfield (UK) Ltd v. Duro Felguera UK Ltd [2015] EWHC
3352 (TCC) was the application of the Act to the building of power generat-
ing stations. Earlier in Severfield (UK) Ltd v. Duro Felguera UK Ltd [2015]
EWHC 2975 (TCC), Stuart-Smith J refused to enforce an adjudicator’s award.
He decided that part of the works fell within the exception in section 105(2)(c)
of the HGCRA 96 as amended, and it was not appropriate to sever the adjudi-
cator’s decision and enforce those parts that fell outside the exception. Follow-
ing that decision the contractor sought summary judgment of the value of its
work having stripped out the sums that were outside the act. The contract was
for the design, supply and erection of steel structures on a project which con-
sisted of the construction of two power generation plants, each one consisting
of a number of different structures. Coulson J decided that this was a ‘hybrid’
contract—part of the work was subject to the HGCRA 96 as amended and
others were not (the power generating part). The parties made provisions for
payment but were unaware that there was such a distinction in the proposed
contract. Section 105(2)(c)(i) provides that the following operations are not
construction operations:
[the] assembly, installation or demolition of plant or machinery, or erection

or demolition of steelwork for the purposes of supporting or providing access
to plant or machinery, on a site where the primary activity is
(i) nuclear processing, power generation or water or effluent treatment or …
[emphasis added]
Coulson J at para 17 referred to the two most recent decisions on the dif-
ficulties created by steelwork in connection with power generating plants.
Ramsey J in North Midland Construction PLC v. AE and E Lentjes UK Ltd
[2009] EWHC 1371 (TCC) reviewed all of the authorities and concluded
that a narrow construction was appropriate for section 105(2). He said that
on that basis, the intention of the legislation was to exclude steelwork which
formed an integral part of the machinery and which was directly and neces
sarily connected to the plant. Other steelwork would come within construc-
tion operations to which the Act applied. In the second case, Cleveland
Bridge (UK) Ltd v. Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076
(TCC), he ruled that it was only the actual ‘erection’ of steelwork which sup-
ported or provided access to plant and machinery which was excluded. All
other aspects of the work were within the scope of the 1996 Act.
At para 21 in Severfield Coulson J said: ‘… the relevant works were being
carried out on a site where the primary activity was power generation’. The
question to be decided was whether the enabling works and the civil works
came within the description of assembly, installation or demolition of plant
or machinery, or erection or demolition of steelwork for the purposes of sup-
porting or providing access to plant or machinery? The answer to this question
matters because, depending on the answer, there may be two different payment
regimes applicable. In North Midland the judge concluded the enabling works
were construction operations and the HGCRA 96 applied. Cleveland Bridge
held that substantial works were excluded and the adjudicator had exceeded
her jurisdiction. Neither case dealt with what payment regime applied. In this
case there were two regimes, the statutory one and the contractual one. To
take advantage of the statutory rules the application for payment had to be
clear and certain, and in this case it was not. This case is discussed further
under ‘pay less’ notices in Chapter 10.
Under the 1996 Act there was a special requirement that the contract had to
be in writing. This caused many problems because industry practice was to use
informal agreements. In fact, a great deal of the problem was caused by the use
of letters of intent. To resolve this, the requirement of section 107 that the con-
tract be in writing was deleted. All oral contracts can be enforced in adjudication
although the adjudication agreement has to be in writing. Where it is not, the
Scheme (2011 SI No. 2333) applies. Cases such as Grovedeck Ltd v. Capital Dem-
olition Ltd [2000] BLR and RJT Consulting Engineers Ltd v. DM Engineering
(Northern Ireland) Ltd (2002) EWCA Civ 270 are no longer applicable. Note
also that private finance initiative contracts and finance agreements are excluded
from the legislation on grounds of policy.
Risk allocation
Like all contracts, construction contracts are about the prior allocation of risk.
Windward (1992) draws attention to the construction industry’s need to make a
profit on the employment of capital:
If risk is an essential ingredient of the system which generates your profit, it

is inevitable that there must be a structure for resolving disputes. It brings
the relationship of the disputants back into balance so that life can resume
its normal course.
Windward’s reference was primarily to arbitration, the main method of dispute

resolution prior to the introduction of adjudication in 1998. It is of course a mat-
ter of debate whether the introduction of statutory adjudication by the HGCRA
96 as amended achieves that balance between disputing parties. It was conceived
by the Latham Report as essentially a ‘quick fix’ in that it was intended to resolve
disputes as they arose rather than at the end of the project, this being the usual
practice before its introduction. What it has become is a much more legalistic
method of resolving a great myriad of disputes. It much be remembered that
standard forms of contract try to allocate risk equitably between the parties. In
essence, the payment provisions of the HGCRA 96 (as amended) can also be
described as an attempt to introduce a measure of equity into the contractual
relationship between contractor and subcontractor. Risks are varied in construc-
tion contracts, and include many factors that can affect the progress of the work.
1 The unforeseen:
(a) unexpected ground conditions
(b) unpredicted severe weather conditions
(c) a shortage of material
(d) a shortage of skilled labour
(e) accidents, whether by fire, flood or carelessness
(f) innovative design that does not work or proves impossible to construct.
2 The length of the contract. Projects vary in the time needed for completion,
from days to years. During that time the risk allocation agreed at the time of
contracting can change substantially. This is especially so with regard to the
availability of materials and its costs. A contractor may have ‘bought’ the job
because work was scarce at the time and the price of components low.
3 The number of participants and parties in the project and the corresponding
length of contractual chain cause their own problems. The risk of insolvency
increases the longer the chain.
4 The particular relationship (often referred to as a triangular relationship of
costs, time and quality) in which conflict is inherent. Contracting parties have
different perceptions of how these factors of their relationship interact.
5 The interaction between liability for defective workmanship and for faults in
design. The Latham Report in item 3.10 identified the lack of coordination
between design and construction as a common source of dispute. Much of
the innovation in procurement systems of recent years stems from creating

ways of minimising the effect of this clash.
Why use a standard form of contract?

There has been a vast proliferation of standard forms in the construction industry
in recent years, and there are many books available on specific forms of contract.
It is not intended to compare those forms here or discuss their similarities or
differences. The way to learn standard forms is to attempt to master one form,
preferably a difficult one like the JCT 11 SF with Quantities. After that it is pos-
sible to read almost any contract. A word of warning, though. Reading a standard
form causes two contrary responses. One is to fall asleep quite quickly and the
other is to run away. It is easiest learnt when either (a) money is being lost or (b)
the other party is claiming big chunks of it. Then it becomes interesting. There
are, though, many advantages to be gained by using a s tandard form of contract.
Advantages
1 The standard form is usually negotiated between the different bodies that
make up the industry. As a result the risks are spread equitably.
2 Using a standard form avoids the cost and time of individually negotiated
contracts.
3 Tender comparisons are made easier since the risk allocation is same for each
tenderer. Parties are assumed to understand that risk allocation and their
prices can be accurately compared.
Disadvantages
1 The forms are cumbersome, complex and often difficult to understand.
2 Because the resulting contract is often a compromise, they are resistant to
change. Much-needed changes take a long time to bring into effect.
Participants
A construction contract is best described as a complex web of competing inter-
ests. A particular problem in construction contracts is that there is little interest in
building long-term relationships. With the growth of partnering it is possible to
argue that much has changed. It is argued that contracts such as the New Engin
eering Contract (NEC), now renamed the NEC Engineering and Construction
contract, provide flexibility and simplicity. Its success also depends on the parties
building long-term relationships and accurate record keeping. In such a case the
contract may well serve only as a document to record the intentions of parties.
Supply chain management is another much-heralded innovation.
The traditional contract is of great importance in understanding the prob-
lems and complexities of construction contracts. Only by analysing the relation-
ship between the employer and the contractor is it possible to understand the
problems that other forms of procurement try to resolve. At the heart of the
traditional contract lies the conflict between design, on the one hand, and work-
manship, on the other. That conflict is complicated further by the need to allo-
cate rights to third parties. In addition, as the modern contractor neither designs
nor builds but manages the process, many subcontractors will be involved in the
constructing of the work (as either builder or designer or both).
The traditional contract

In such a contract the employer contracts with an architect or engineer to carry
out the design. The architect, engineer or project manager, acting as the agent
of the employer, supervises the construction of that design. The contractor
enters into a contract with the employer to build that design. There is no guar-
antee given by the employer to the contractor that the design can be built. In
carrying out the work, the contractor employs both subcontractors and suppli-
ers of services, goods and equipment. These may in turn be classified as domes-
tic or nominated, or now named. Out of the relationship between these parties
arises the problem of privity of contract: the basic rule that only parties to a
contract can enforce the contract. In summary:
(a) in the absence of a warranty there is no contractual relationship between the

employer and subcontractors and suppliers
(b) third parties have no contractual rights.
The use and spread of collateral warranties have resolved some of the problems
caused by the doctrine in providing for the forming of contractual relations with
third parties. The passing of the Contracts (Rights of Third Parties) Act 1999
(TPA 99) provided an opportunity to simplify this area, but this piece of legisla-
tion has not been as widely adopted by the construction industry as expected.
Instead, the standard forms of building contract, specifically excluded the appli-
cation of the Act from these forms. However, the Standard Building Contract
With Quantities 2011 edition (SBC/Q 2011), hereafter called JCT 11, makes
provision for parties to use the Act as an alternative to using collateral warranties.
Some warranties specifically exclude the operation of the Act; ‘It is not intended
that any third party (other than the Beneficiary) should have the right to enforce
a provision of this deed pursuant to the TPA 99.’.
The tendering process

Whatever the method of procurement adopted, the tendering process in the United
Kingdom is based on competitive bidding. To ensure transparency in this process
the National Joint Consultative Committee (NJCC), an organisation consisting
of the major professional bodies involved with construction, produced codes of
procedure (although disbanded in 1996, its documents are still in use) and can be
found at https://www.scribd.com/doc./46258072/NJCC, for example.
Open tenders
The first step in this type of tendering is an advertisement in the technical press call-
ing for expressions of interest. Parties can obtain the documents needed from the
body placing the advertisement or its agents. The advertisement usually contains a
brief description of the location, the type of work being proposed, the scale of the
project and the scope of the proposed work. Interested contractors are invited to
apply for the details. The main disadvantage of this type of tendering is that it is
indiscriminate in its approach, costly and likely to attract inexperienced tenderers.
Local authorities have in the past tended to favour this method of procurement.
Its use has been affected by European Directives. The principles guiding the Euro-
pean courts are found in European Directive 2004/18/EC with regard to the
procedures for the award of contracts by public authorities. The directive has been
incorporated into domestic law by the Public Contracts Regulations 2006, which
apply in England, Wales and Northern Ireland since December 2006. These were
followed by a number of regulations aimed at opening the European construc-
tion market. In public procurement this is the main form of selection although the
tendering procedures have become increasingly complex. The financial thresholds
change every two years. Because it applies to all public and LG projects, health
authorities, police, education authorities and so on, it is therefore applicable to a
wide range of projects. This is discussed further in Chapter 3.
Single-stage selective tendering

The NJCC code considers that this procedure is suitable for both private and
public sector works. This procedure restricts the number of tenderers by prese-
lection from either an approved list or on an ad hoc basis. A limited number (up
to six) are selected on the basis of general skill and experience, financial standing,
integrity, proven competence with regard to statutory health and safety require-
ments, and their approach to quality assurance systems. Thereafter price alone is
the criteria, the lowest tender being selected.
Two-stage selective tendering

The NJCC regards this as a suitable method where the early involvement of
the main contractor is required before the Scheme is fully designed. It enables
the design team to make use of the contractor’s expertise. The contractor also
becomes involved in the planning of the project at an early stage. The first stage
consists of the selection of the contractor on the basis of a competitively priced
tender but with minimal information provided. The submission is on a basis of
the layout and design of the works, clear pricing documents relating to the pre-
liminary design and specification, and the conditions of contract. In the second
stage the employer’s professional team collaborates with the selected contractor
in the design and development of production drawings for the whole project.
A bill of quantities (or it may simply be priced on drawings and a specification) is
prepared and priced on the basis of the first-stage tender. If an acceptable sum is
produced the contract documents are then prepared. This method is considered
to be useful for building works of a large or complex nature, where the brief is
unlikely to change. It is recommended for projects where the design and con-
struction phases may overlap and the contractor’s design expertise can be utilised.
Selective tenders
Normally called design and build contracts, these are also called turnkey con-
tracts, which is a wider description of what the employer may expect (i.e., the
employer puts the key into the door of the new factory and starts it up). The
contractor’s price is to carry out and complete the works in accordance with the
conditions of contract. The tender includes the whole of contractor’s proposal
including price and design. The NJCC Code of Procedure for selective tendering
for design and build describes its code as a procurement method that combines
the design and construction responsibilities.
Other modes of selection

Negotiation
Contracts are seldom entered into on this basis alone. Parties may negotiate an
extension to a contract, additional work outside the scope of the contract may be
agreed, or additional work may be carried out elsewhere for the same employer.
Joint venture
A joint venture is where two or more companies pool resources for a project
beyond the resources of the single companies. It may be used on one project or
the agreement may be for a specified period. The co-venturers accept joint and
several liability for the project.
Other means of procurement

Various types of ‘procurement systems’ have evolved in recent years to deal with
the difficulties perceived within the traditional contract.
(a) Management contracting. Here the employer engages the management

contractor to partake in the project at an early stage. Normally an experi-
enced builder, the contractor is employed not to undertake the work but to
manage the process. All the work is subcontracted to works contractors who
carry it out.
(b) Construction management. This differs from management contracting in that
the employer enters into a direct contract with each specialist. The employer
engages the construction manager to act as a ‘consultant’ to coordinate these
contractors.
(c) Project management. The project manager is employed to coordinate all the
work needed from design to procurement and construction on behalf of the
client.
(d) Partnering. The rise of partnering in UK construction can be seen as a
response to the widely held view that the industry was inherently flawed.
After the boom times of the 1980s and subsequent recession of the early
1990s it contracted sharply. A culture of conflict persisted in the industry,
with employers and contractors operating in a highly adversarial manner,
with contractors taking on greater risks in a fiercely competitive market. In
many cases, in order to secure contracts and survive, contractors had to ten-
der at cost (or even under), and recover margins through building claims
into the contracting process and withholding payments to subcontractors.
The essence of any partnering agreement now involves a duty of good faith,
mutual cooperation and trust between all parties involved in the construc-
tion process. This is discussed further in Chapter 2.
(e) The Private Finance Initiative (PFI). The aim of the system known as PFI
is to involve the private sector in the provision of public services. In essence
the PFI contract is a concession granted by the public sector to the private
sector. The private sector company provides the vehicle by which the pro-
ject company secures the finance to provide services for running the asset
provided. This may be a hospital, the provision of information technology
projects and services or the running of the London Underground. The pur-
pose of private and public partnerships is to share the risk of the ‘project’.
For a contractor’s perspective see Martin Lenihan at www.scl.org.uk.
The incorporation of documents

The usual approach in books on contract law is to deal with this topic after
discussing formation and before dealing with the terms of the contract. The
approach taken here is to deal with it as part of the discussion of standard forms
and the tendering process itself. It was commented earlier that parties use stand-
ard form contracts because they bring certain commercial benefits. The question
of whether those documents are incorporated into the contract may prove cru-
cial. Parties often make reference in contractual documents to the contract being
‘subject to conditions available on request’. Such a reference, when brought
to the notice of the other party, is sufficient to incorporate the current edition
of those conditions of contract. This rule was decided in Smith v. South Wales
Switchgear Ltd [1978] 1 All ER 18.
Sometimes the terms on which the work is to be let are referred to in corre-
spondence passing between the parties. Terms of a standard form of contract may
be incorporated into the contract by such a reference. A contract was made by
exchange of letters in Killby and Gayford v. Selincourt [1973] 3 BLR 104.
The parties may make a contract using a standard form of contract in cir-
cumstances where the use of the form is inappropriate. For example, a main
contractor may sublet work proposing the use of a standard form of contract not
intended for such contracts, or a fixed fee contract may use one which allows for
variations. Where the parties do so, a court may try to make sense of the vague
references to it. In Modern Buildings (Wales) Ltd v. Limmer and Trinidad Co Ltd
(1975) 14 BLR 101 this rule was applied.
In Brightside Kilpatrick Engineering Services v. Mitchell Construction [1973]
Ltd (1975) 1 BLR 624, the printed references to the green form had been
deleted. The Court of Appeal had to construe references to the main contract
condition contained in the subcontract order. Buckley LJ said at 65:
The contention for the defendants has been that the statement in the docu-
ment of 24 March 1972 that ‘the conditions applicable to the sub-contract
with you shall be those embodied in the RIBA as above’ is a clear reference
to the main contract and the effect of that is to import into the contractual
relationship between the contractor and the sub-contractor all the terms of
the head contract … substituting for references to the building owner refer-
ences to the contractor, and substituting for references to contractor refer-
ences to the sub-contractor.
This approach to making sense of documents has changed since the introduction
of adjudication and the Scheme. It is not necessary for judges to try and make
sense of the various documents if the dispute is about payment and the time limits
for paying less. Chartbrook (below) did not help in RMP Construction Services
Ltd v. Chalcroft Ltd [2015] EWHC 3737 (TCC) to persuade the judge to read
words into the document. He said that not even the widest possible reading
would enable him to rewrite its proposed contract so as to substitute ‘JCT 2011
Edition Design and Build Contract’ for the words ‘standard JCT 2011 Design
& Build Contract Without Quantities’ as argued by the employer. The other dif-
ficulty he had was substituting JCT standard form of subcontractor (DSC/C),
which is obsolete, with JCT 2011 Standard Conditions of Sub-Contract, the cur-
rent standard form.
The construction of contracts

Amongst the issues that often arise in construction contracts is the meaning of
words used by the parties in their written contracts. The process by which courts
arrive at this meaning is called construing the contract. The resulting meaning as
determined by the court is called the construction of the contract. Lord Diplock,
in Pioneer Shipping v. BTP Toxide, The Nema [1982] AC 724 at 726, said that the
object in construing any commercial contract is to ascertain: ‘What each [party]
would have led the other to reasonably assume were the acts he was promising
to do or refrain from doing by the words in which the promise were expressed.’
From the many authorities examining this topic it appears that in the end what
predominates now is the commercial purpose of the contract – does the mean-
ing argued for make business common sense? It is not always the case as Lord
Neuberger warned at para 20 in Arnold v. Britton & ors [2015] UKSC 36 that
while commercial common sense is a very important factor, the natural meaning
should not be rejected merely because in hindsight it was a risk one party may
not have meant to take.
Expressed intention
In construing a contract, the court applies the rule of law that while it seeks to
give effect to the intentions of the parties it must give effect to the actual words
used. It must decide what the parties actually meant by using those words.
Intention does not, however, equate to ‘motive, purpose, desire or state of
mind’. Those are subjective states. The common law adopts an objective stand-
ard of construction by excluding general evidence of the actual intention of
the parties. The meaning of the phrase ‘expressed intention’ was considered by
Lord Hoffman in a number of cases. In Mannai Investment Co Ltd v. Eagle Star
Life Assurance Co Ltd [1997] AC 749, he reiterated the well-known principle
that the law was not concerned with the subjective intention of the speaker. He
went on to say that contained in the expression ‘the meaning of the words’ was
an ambiguity that could not be ignored. This ambiguity was itself twofold. One
concerned the meaning of the actual words themselves, whether contained in
dictionaries or in the effect of their syntactical arrangement in grammar. The
second was what the person who used them understood them to mean with
regard to the factual background in which they were used. He went on to say:
It is the background which enables us, not only to choose the intending
meaning when the word has more than one dictionary meaning but also to
understand a speaker’s meaning, often without ambiguity, when he has used
the wrong words.
In Transfield Shipping Inc v. Mercator Shipping Inc [2008] UKHL 48 at 28, Lord
Hoffmann said: ‘the court is engaged in construing the agreement to reflect the
liabilities which the parties may reasonably be expected to have assumed and paid
for. It cannot decline this task on the ground that the parties could have spared
it the trouble by using clearer language’. In Chartbrook Ltd v. Persimmon Homes
Limited and ors and anor [2009] UKHL 38, it was required to do just that. The
parties were in dispute over the eventual price payable. The builder agreed to
obtain planning permission to develop the site. Under a licence granted by the
developer, it constructed mixed commercial and residential properties to be sold
on long leases. It then directed the developer to grant long leases to these tenants.
Out of the proceeds the builder agreed to pay the developer an agreed price for
the land. The issue was what that price was in their complex financial arrangement.
At para 14, Lord Hoffmann observed that there was no dispute about the
principles to be applied. Where a contract (or any other instrument or utterance)
has to be construed, they were summarised by the House of Lords in Investors
Compensation Scheme Ltd. The question was what would a reasonable person,
having all the background knowledge which would have been available to the
parties, have understood them to be using the language in the contract to mean.
The House emphasised that ‘we do not easily accept that people have made lin-
guistic mistakes, particularly in formal documents’. He emphasised that it was the
context and background that drove a court to the conclusion that ‘something
must have gone wrong with the language’. In such a case, the law did not require
a court to attribute to the parties an intention which a reasonable person would
not have understood them to have had.
It is almost as if Chartbrook opened the litigation flood gates. It may simply be
that in discarding the old framework, it became easier to challenge the wording
of Construction
Adriaanse, John. disputedContract
commercial contracts.
Law, Macmillan Since
Education UK, then the
2016. ProQuest Supreme
Ebook Central, Court has considered
the principles in a number of cases. The judgment of Lord Clarke in Rainy Sky
SA & ors v. Kookmin Bank [2011] UKSC 50 is now considered the leading one.
In Arnold Lord Neuwberger said at 14 that ‘Over the last 45 years, the House of
Lords and Supreme Court has discussed the correct approach to the interpreta-
tion, or, construction of contracts…culminating in Rainy Sky SA.’
For the application of the principles Investors in a construction setting, see the
judgment of HHJ Seymour QC in Tesco Stores Ltd v. Costain Construction Ltd
and ors [2003] EWHC 1487 (TCC) at para 161. See also Jackson J (as he was
then) in Multiplex Construction (UK) Ltd v. Cleveland Bridge UK Ltd [2007)
EWHC 145 at para 155. That approach has now been reconsidered (or better
explained) and applied in a number of recent decisions of interest to the industry.
Jackson LJ (with whom Underhill and Patten LJJ agreed) in MT Hojgaard A/S
v. E. On Climate and Renewables UK Robin East Rigg East Ltd & anor [2015]
EWCA Civ 407 relied upon the observation of Lord Clarke in Rainy Sky SA
that where there are two possible interpretations of a provision, the court was
entitled to adopt the one that was consistent with business common sense. He then
went on to consider the legal principles that should guide the court in deciding
whether the contractor had guaranteed that the foundations would have a life of
20 years in the harsh environment of the North Sea [para 87]:
(i) The court must assume there is a reasonable person having all the knowledge
available to the parties.
(ii) The court has to consider what that person would have understood the two
critical clauses to mean. This process is iterative requiring (a) checking each of
the rival meanings against other contractual provisions and (b) investigating
the commercial consequences.
(iii) The court must accept there will be ambiguities and inconsistencies in the
documents but must not be led astray by them.
(iv) By approaching matters in this way the court can decide whether (a) the
critical contractual provisions (b) compliance with international standards
and (c) was meant to achieve a result viz service life of 20 years.
Having done so he concluded that the contractor had not agreed to do so, and
allowed the appeal: this case is discussed further in Chapter 13. In Secretary of
State for Defence v. Turner Estate Solutions Ltd [2015] EWHC 1150 (TCC), a
Maximum Price Target Cost contract, Coulson J, applied the business common
sense tests outlined by the Supreme Court decision in Rainy Sky SA, in particular,
the judgment of Lord Clarke at para 21 where he said that: ‘If there are two possi-
ble constructions, the court is entitled to prefer the construction which is consist-
ent with business common sense and to reject the other.’ At para 63 Lord Clarke
referred to a number of authorities in which this approach is explained, including
Barclays Bank PLC v. HHY Luxembourg SARL [2010] EWCA Civ 1248 where
Longmore LJ said at para 26: ‘If a clause is capable of two meanings, as on any view
this clause is, it is quite possible that neither meaning will flout common sense. In
such circumstances, it is much more appropriate to adopt the more, rather than
the less, commercial construction.’ Coulson J concluded at para 56 that:
the contractor’s argument failed the business common sense test. One fail-
ure to follow administrative provisions in a complex long term contract,
could scarcely change detailed clauses for sharing the risks into a simple cost
plus contract.
In Khurana & anor v. Webster Construction Ltd [2015] EWHC 758 (TCC), HHJ
Davies (sitting as a Judge of the High Court) applied Rainy Sky SA in the context
of the true construction of the adjudication agreement. This was whether the par-
ties had agreed in exchange by correspondence (by lawyers) that the findings of the
independent QS would be binding on the parties. It also required the court to con-
sider the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) when
making that decision. In Portsmouth City Council v. Ensign Highways Ltd [2015]
EWHC 1969 (TCC), in the context of a PFI contract Edwards-Stuart J also did so.
The issue was the correct interpretation and application of ‘service points’ used to
measure performance. In both these cases the ‘business sense’ argument predom
inated in interpreting what the words in dispute meant.
Not all cases use the business sense test. In Bloomberg LP v. Malling Pre-
Cast Ltd [2015] EWHC 2858 (TCC), a clause in collateral warranty was
interpreted strictly according to its legal meaning. Grove Developments Ltd
v. Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC) had
a Part 8 application for declaration resisting the enforcement of the award
of the adjudicator. Stuart-Smith J had to decide what the parties had agreed
their payment provisions to be. The contract terms were the JCT Design
and Build Contract 2011, which the parties had amended. He referred to
the well-known authorities on the interpretation of commercial documents,
especially the business common sense test. He pointed out the limitation of
this approach since it could well depend on whose approach was being con-
sidered. At para 24 he stated that where words have more than one meaning,
the court is entitled to prefer the one consistent with business common sense.
He declined to imply a term into the contract that interim payments would
continue to be made after the contractual date for practical completion. The
contractor’s submission that commercial common sense demanded or justi-
fied the implication of a term that there would be further interim payment
after that date was really a failure by them to appreciate the risks they ran in
the arrangements they made.
Construction of the document also was at stake in Manor Asset Ltd v. Demo-
lition Services Ltd (Rev 1) [2016] EWHC 222 (TCC), where Edwards-Stuart
J once more reviewed the recent authorities. He concluded that at para 45:
I shall therefore approach Lord Hoffmann’s observations in Belize Telecom in

the light of the qualifications made by Lord Neuberger in Marks & Spencer.
However, the overriding point to be borne in mind is that before implying
any term the court must conclude that the implication of that term is neces-
sary in order to give business efficacy to the contract or, to put it another
way, it is necessary to imply the term in order to make the contract work as
the parties must have intended.
The amendment made by the parties to the contract made payment of demoli-
tion work subject to the achievement of milestones. The first occurred when 60
per cent of the work was complete. Payment was to be made 72 hours after the
receipt of the invoice. The real question was when a pay less notice had to be
issued. The judge decided that whether by construction or by implication, the
parties must have intended that it should be issued in that period.
In Wilson and Sharp Investments Ltd v. Harbour View Developments Ltd
[2015] EWCA Civ 1030, the court of appeal had to interpret the meaning of
clauses 8.5.3 and 8.7.3 in the JCT IBC with CD (2011) Conditions of contract.
It applied the principles of contract interpretation in concluding that the clauses
on insolvency applied even where the contract had already been terminated. This
is the opposite of the situation in Melville Dundas where the insolvency occurred
before the date for payment of the interim certificate. This is now section 111
(10) of the HGCRA 96 as amended (see Chapter 10).
Extrinsic evidence
The general principle for written contracts is that extrinsic evidence, outside of
the document itself, is not admissible by a court. No extrinsic evidence may
normally be adduced to contradict, vary, add or subtract from the written terms.
There are a number of exceptions.
Blanks
Where a complete blank is left in a material part of a contract, evidence is not
admissible to fill those blanks: see Kemp v. Rose [1858] 32 LT, (OS) 51, where
the date of completion was o mitted from the contract. To insert it would have
resulted in the imposition of an onerous liquidated and ascertained damages
clause. The court refused to admit evidence that each party had been told of the
date. See also Temloc Ltd v. Errill Properties [1987] 39 BLR 30 where ‘Nil £’
was held to equal a blank.
Preliminary negotiations
Where the parties have reduced their negotiations to a final written contract,
preliminary negotiations such as letters cannot be referred to for the purpose
of explaining the parties’ intentions. In Davis Contractors Ltd v. Fareham
Urban District Council [1956] AC 696 [1956] 2 All ER 145, a covering
letter was sent subject to certain terms. After negotiations, a formal contract
was signed which defined the contract documents but without including the
letter. It was held that the term contained in the letter was not part of the
contract.
Deletions from the printed documents

A question that often arises is whether it is permissible to look at deletions from
printed documents. If it is permissible, for what purpose can it be used? Keating
(2012, p. 55) says there are two schools. One school, an old weighty authority,
states that it is not permissible to look at deletions at all. The rule was followed
in a number of recent cases: see for example Wates Construction v. Franthom
Property [1991] 53 BLR 23. The other school says that where the parties use a
printed form and delete part of it, the deleted part can be looked at to decide
what they have agreed to leave in. This was the approach adopted in Motram
Consultants Ltd v. Bernard Sunley & Sons [1975] 2 Lloyd’s Rep 197, where the
House of Lords referred to the deletion from an existing contract of a clause giv-
ing the employer the right to set off monies owed to the contractor. It decided
that the parties had directed their minds to the question of set-off and decided
that it should not be allowed. The second school was preferred. Where there is
an ambiguity it is possible to look at deletions in order to throw light on the
subject.
Where intrinsic evidence is permissible

1 Where foreign or technical words can be proven. If there is no dispute about
technical words, the court can inform itself by reliable means. Counsel can
provide an explanation, dictionaries can be consulted or an assessor appointed.
2 Custom or usage. Evidence is permissible to show that the words were
used according to a special custom or usage known to the trade or locality
applicable to the contract. Everyone must know about it. In Symonds v. Lloyd
(1895) 6 CB 691, it was accepted by the court that ‘reduced brickwork’
meant brickwork nine inches thick.
Rules of construction
This is only applied where there is some ambiguity or inconsistency. Where the
meaning of words is plain, the court gives effect to them.
Ordinary meaning
The court decides as a matter of fact whether the case is within the ordinary mean-
ing or not. The grammatical and ordinary sense of a word is to be adhered to. In
doing so it also adopts the reasonable meaning. Where terms are ambiguous and
two meanings are possible, the court adopts the reasonable meaning.
Written words prevail

Where there are printed contracts with clauses inserted or filled which are then
inconsistent with the printed words, the written words prevail over the printed.
Written words reflect the selection made by the parties.
Ejusdem generis rule

This phrase means ‘of the same type’. This means that where words of a particular
class of words are followed by general words, the general words are treated as
referring to matters in the same class. Thus in a clause dealing with non-delivery,
where the port was unsafe ‘in consequence of war, disturbance, or other causes’,
ice was held not be within the class. Another example is the presence of a clause
that entitled the contractor to an extension of time if the works were ‘delayed by
reason of any alteration or condition … or in the case of a combination of work-
men, or strikes, or by default of sub-contractors … or any other cause beyond the
contractor’s control’. The clauses were held to be limited to those ejusdem generis
within the clause described. It did not, as a result, include the employer’s default
in failing to give the contractor possession of the site.
Contra proferentem
This simply means that where the words are ambiguous they are construed
against the profferer, the person who drafted the document. As it is the person’s
own document, he or she must know what he or she meant by the words used.
Frazer J observed in Bloomberg (2015) at para 23 that ‘Turning to … [QC’s]
reliance upon the contra proferentem rule, I bear in mind the judgment of Lord
Neuberger MR in K/S Victoria Street v House of Fraser (Stores Management) Ltd
[2011] EWCA Civ 904, when he said at para 68:
… such rules are rarely if ever of any assistance when it comes to construing
commercial contracts. ‘Rules’ of interpretation such as contra proferentem
are rarely decisive as to the meaning of any provisions of a commercial con-

tract. The words used, commercial sense, and the documentary and factual
content, are, and should be, normally enough to determine the meaning of
a contractual provision.
Where the representative bodies or committees have drafted a standard form of

contract such as the JCT 98, JCT 11, the NEC3 the ICE 7th, or the ICC Infra-
structure Conditions of Contract the rule does not apply.
Summary
1 All contracts for work and materials are subject to the provisions of
the HGCRA 96 as amended.
2 The Act introduces a statutory definition of a construction contract.
This is wider than the common law definition and includes contracts
to carry out design. It introduces payment provisions and a right to
have disputes resolved by adjudication.
3 Parties need to be wary of the definition of ‘construction operations’.
4 Contracts are about the allocation of risks, which are varied in such
contracts.
5 The length of the chain in construction contracts increases the nature
of the risks.
6 Standard forms of contract attempt to allocate risk fairly between the
parties.
7 Modern innovations in procurement methods try to resolve the basic
conflict between design and workmanship, which is at the heart of the
traditional contract.
8 Competitive tendering and the various procurement systems allocate
risk in different ways.
9 Standard forms may be incorporated into the contract by an exchange

of letters. Whether they are can also depend on how easily the
documents could have been obtained by the party arguing that they
were not part of the contract.
10 Courts will attempt to use vague references to such contracts in order
to make a contract work.
11 The meaning of expressed words used is subject to the rules of
construction. The result of the process is called construing the contract.
12 Since the courts have adopted a more flexible approach to the
meaning of words in a contract, challenges to written commercial
documents have become more common.
13 In construing words used in a contract great attention should be paid
to the ‘matrix of facts’.
14 The factual background is crucial to deciding what the parties meant
by the words they used.
15 When in doubt what now predominates is business common sense in
interpreting the contract. This is illustrated by MT Hojgaard A/S and
construction industry cases in this chapter.

The Nature of Construction Contracts

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The Nature of Construction Contracts

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1

The Nature of Construction

What is a construction contract?

• the carrying out of construction operations

Section 104(2) extends the definition of a construction contract to any agree-

Problems with ‘Construction Operations’

[the] assembly, installation or demolition of plant or machinery, or erection

If risk is an essential ingredient of the system which generates your profit, it

Windward’s reference was primarily to arbitration, the main method of dispute

the innovation in procurement systems of recent years stems from creating

Why use a standard form of contract?

The traditional contract

(a) in the absence of a warranty there is no contractual relationship between the

The tendering process

Single-stage selective tendering

Two-stage selective tendering

Other modes of selection

Other means of procurement

(a) Management contracting. Here the employer engages the management

The incorporation of documents

The construction of contracts

I shall therefore approach Lord Hoffmann’s observations in Belize Telecom in

Deletions from the printed documents

Where intrinsic evidence is permissible

Written words prevail

Ejusdem generis rule

are rarely decisive as to the meaning of any provisions of a commercial con-

Where the representative bodies or committees have drafted a standard form of

9 Standard forms may be incorporated into the contract by an exchange

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